Pitfalls of Funding Secure Secondary Market

Last post: Jun 9, 2016

Enticed by rates of return well into the teens, the Secret Investor has been making purchases on Funding Secure’s Secondary Market. What he failed to realise was how HMRC rules would see his tax obligations gobble up most of his profits and put him at risk of making a loss with regards to these particular loans.

Enticed by rates of return well into the teens, the Secret
Investor has been making purchases on Funding Secure's Secondary Market. What
he failed to realise was how HMRC rules would see his tax obligations gobble up
most of his profits and put him at risk of making a loss with regards to these
particular loans.

The tax legislation does however provide small scale investors
with opportunities to make a healthy profit – now and, possibly to a greater
extent, in the future when IFISAs become available on this platform.

The scenario which caused The Secret Investor grief involves
how interest is not paid by borrowers until the completion of Funding Secure
loans (unlike many other platforms). This means buyers on the Secondary Market
have to pay sellers "accrued interest" in lieu of what they have earnt up to
the point when a sale takes place. Assuming loans are then held until
termination, buyers will ultimately receive 100% of the interest (and of course
the capital) that is paid.

This all seemed pretty straight forward to The Secret
Investor who expected to get excellent returns on the remaining balance of the
loans he had been picking up however the HMRC regard "accrued interest" as a
fee rather than… accrued interest!

This means, as with traditional bank account fees, this
payment is not subtracted from the profits the buyer earns from a loan and so tax
is calculated on the interest that comes in from the borrower in its entirety.
If loans are purchased close to maturity, the bill from the HMRC could exceed
the net return resulting in a loss after tax.

Even more remarkably, the seller is not liable for tax on
the accrued interest as it is regarded as a capital transfer. Only if the same
loan is bought and sold could an investor be regarded by the HMRC as a "trader"
and possibly have to pay Capital Gains Tax if they have exceeded their Capital
Gains annual exemption allowance which is currently £11,100 for an individual.

The Secret Investor should have been more savvy when so many
loans with high returns were being sold at a premium – the old adage about when
something is too good to be true springs to mind. Furthermore, there is a
prominent warning at the top of the Secondary Market's web page. Fortunately,
he has not made too many purchases of this nature.

For those operating on a very small scale, there is good
money to be made here as no tax is paid on the first £1,000 of interest that an
individual earns (from all sources) so they will get the full return up to that
level. Also, in future, if these Secondary Market purchases can be made within
an IFISA wrapper then this would be one of the best tax free returns within the
P2P sphere – this assumes there are still enough people acquiring loans outside
of an IFISA who are looking to sell before getting hit by the taxman.

Comment

Choice Loans is a broker, not a lender. We will
connect you with a lender suitable for your needs or, if appropriate, a
specialist broker. We do not charge you an upfront fee but, if your application
is successful, a broker commission may be charged.